B.A. (Hons), M.A (Econ). Ph.D., Hon. D.Sc Europe).

distinguished Indian Economist

PROJECT EVALUATION CRITERIA AND COST-BENEFIT ANALYSIS(1980)

  • Overview
  • Preface
  • Index
  • Review
  • Impressions

 

This monograph contains twelve essays from experts in the field of evaluation, project appraisal and the cost-benefit analysis. This new edition is extensively revised and enlarged.


The contributions are by men with rich experience in the line and the monograph is edited by an author of rich experience in evaluation and project appraisal for about three decades.

It is hoped that this monograph will be useful to all those concerned with evaluation and cost-benefit analysis

In view of the scarcity of resources for investment, the developing countries must endeavour to make the best use of the ones available. One of the most difficult decisions that faces Governments in evolving a strategy for investment is the priority they should accord to the social as against the economic sectors. There is need for careful appraisal of investment requirements before decision on investment allocation are made.

In underdeveloped and developing countries, to achieve the aims of projects selected requires that emphasis be laid on changing the proportion of income allocated to consumption and investment. In order to accelerate development along sound lines, developing countries must be able to identify a large number of potential projects and priority areas on a rational basis. Good projects are the base of economic development. Sound projects are those which satisfy the economic criteria of efficiency.

In order to effectively marshal the necessary technical services, facilities and resources for economic development, co-ordinative measures at all possible levels, both in the process of planning and execution of plans, are required. With every important programme, provision should always be made for the assessment of results. Systematic evaluation should become a normal administrative practice in all branches of public activity. Evaluation of development programmes implies the application of the fact-finding process to the problems and methods connected with the implementation of these programmes. By evaluating the progress of a programme, it is possible to locate needs, identify some of the barriers to its success and thus suggest ways and means to overcome these obstacles. It is on the sound basis on which the plans are formulated, the extent of watchfulness with which they are monitored, how objectively they are evaluated and the results translated into action, that the success of the whole plan depends. Plan monitoring and evaluation are important aspects on which the success of a plan depends. The benefit-cost analysis serves as an effective and useful instrument in the selection of programmes and projects for economic and social development.

There are three stages in evaluation. The first stage is before any change or any further change occurs in the existing situation, i.e., before the programme is started so as to establish a 'benchmark'. Evaluation at this stage, assess the economic feasibility of the programme or project. This type of evaluation is called 'pre-project' or 'ex-ante' evaluation. At the second stage, evaluation may be conducted when the programme is in operation and this is called 'concurrent' evaluation. This is very useful as it identifies pitfalls and suggests remedial measures for a more satisfactory implementation of the programme during the remaining period of its operation. The third stage is at the end, i.e., after the programme has run its course in order to assess the ends achieved. This evaluation is called 'ex-post' or 'end' evaluation. Such an evaluation of this type determines the usefulness of the programme in its totality.

The above three-phase evaluation is quite useful as it is conducted at three different stages. The time element in evaluation is an important factor on which the utility of evaluation studies depends. The 'ex-ante' evaluation helps to ascertain the economic feasibility of projects by means of sophisticated techniques like the cost-benefit ratio, the input-output technique or the project ranking methods. The concurrent evaluation which is done simultaneously as the programme progresses helps to detect flaws in implementation and difficulties and shortages encountered during the course of operation. Thus it initiates improvements for the rest of the programme. The 'ex-post' or 'end' evaluation, or the 'post-project' evaluation as it is called, helps to assess in its totality the benefits accrued and detects flaws in the overall scheme and methods of implementation. Such an evaluation is useful for future guidance.

From the point of view of economic development it is important to select only very vital subjects at a given time. The time and effort lost on unimportant subjects could help secure better results on subjects of more importance to the economy.

The cost-benefit analysis is an important tool in project appraisal. This technique is widely used to ascertain the usefulness of a project. Project appraisal can best be defined as the 'ex-ante' or 'pre-project' analysis of the effects of a proposed course of action. The value of a project is determined through: (1) technical analysis (for determining whether the technical specification, parameters such as the input and output mixes are realistic); (2) financial analysis (for estimating the costs and the flow of returns); (3) commercial analysis (for determining whether product specifications, market plans and organisational structures are sound); and (4) social profitability analysis (for determining whether the project is worthwhile from the point of view of the society as a whole). The Social Cost-Benefit Analysis confines itself largely to the last activity of project appraisal.

This monograph contains ten essays from eminent men in the field of evaluation and project appraisal.

The first five chapters relate to various aspects of evaluation and the last five directly relate to the cost-benefit technique.

It would be necessary to present a brief overview of the content of the ten chapters. The first two chapters by Mr. R.K. Dar and myself serve the purpose of setting the background for discussion on evaluation methodology. Mr. Dar in his paper Philosophy, Perspective and Objectives of Evaluation gives an overview of the approach to evaluation in general terms.

Evaluation can be described as a stock-taking exercise based on application of standards of rationality in the performance of the visualised tasks. It has to be selective since time and resources are limited. An evaluator searches for factors which favour or hinder the achievement of the objectives of a programme. The process of evaluation needs a good deal of patience on the part of the evaluator as well as the other participants.

The essay Objective, Scope and Methods of Evaluation, by me (Chapter 2) emphasises evaluation as an essential aid to policy. The objective, scope and methods of conducting such an evaluation are broadly discussed. While conducting the study, the problems to be tackled have to be spelted out in detail. The impact of the programme has to be assessed, depending upon its objectives. The evaluator should examine the manner in which the new ideas should be presented to the people. Evaluation should be based on the implementation of the programme, the techniques of enquiry and analysis adopted. The main priority is to get some measure of the working and impact of the programme and to indicate the causes of its failure or success. The evaluator's major responsibility is to bring his findings to the notice of those who frame and run the programme. His studies bring out the strength and weakness of the programme.

The third chapter, Approach to the Formulation of Criteria in Evaluation is a very important one, a contribution by Dr. J.P. Bhattacharjee. This chapter contains the material of two of his papers, viz., Criteria in Evaluation, and Competing Issues in Evaluation. Dr. Bhattacharjee has lucidly brought out the role of formulation of criteria in evaluation, how difficult it is and how important in the course of determining the methodology. The competing issues in evaluation methodology are also discussed. The formulation of hypotheses should be specific and clear and the criteria of evaluation are derived from these. The end product of any evaluation is correct judgement in regard to the problems in implementation and in suggesting remedial measures.

An evaluation study should be objective in its approach, it should satisfy the requirement of scientific method and it should be purposeful in its analysis and results. The success of evaluation lies in the extent to which it leads to corrective action. There is need for deeper and more integrated planning. The criteria of selection for evaluation depend on factors like programmes of a pilot nature, programmes which are lagging behind, programmes having large outlays, special schemes and programmes of a crash nature. In some of cases, the evaluators should have the knowledge of the course of their implementation. Once the programme for evaluation is selected, the aspects which have to be covered, the design of the study and schedules have to be decided. The objectives have to be framed. Then the next stage is the collection of data and field investigation. The data will be tabulated. The last stage is the drafting of the report. Presentation of the report is a difficult task. Once the report is finalised, the recommendations have to be. implemented. These points have been highlighted by Dr. J.P. Bhattacharjee.

The paper, Some Issues in Methodology of Evaluation with Large Social Content (Chapter 4) was presented by Mr. Dar and Mr. C.S. Grewal at the Symposium on Recent Developments in Survey Methodology organised in March, 1976, by the Indian Statistical Institute Calcutta.

In this chapter, evaluation and survey methods are discussed. These studies may be broadly classified into three broad categories. The first is intended to generate factual information of a type required by the planners. The second category covers special programmes like the Drought Prone Areas Programme, Small Farmers Development Agencies, etc. The third category of programmes is in the pilot nature. The formulation of the sampling design is an important aspect. The sample size has to be determined. The sample selection is subjective at the primary level and in the other stages it is based on the laws of probability. The beneficiary units will ultimately form the units of sampling. The soundness of the statistical design is the primary consideration. The statisticians could play a greater role in framing the sampling design which would help in the process of planning.

The main focus in chapter 5 by Mr. J.N. Tewari, Household Approach in the Evaluation Studies is on the beneficiary. The broad strategy is to cover all the crucial units of operation of the programme. The schedules have to be so structured so as to get the detailed information through the household approach. Adjustment factor has to be provided to the estimates and this should be based on the administrative intelligence records. Here, some yardstick has to be applied to determine the correction factor. Evaluation study determines whether the household approach shall be able to deliver the goods or whether it is to be combined with the establishment and institution approach. The material collected will have to be integrated and improvements suggested.

As said earlier, chapters 6 to 10 have direct relevance to the cost-benefit analysis. Of these five chapters, two are by Prof. S. Venu, one by Mr. J.N. Tewari and two by Mr. S.K. Gandhe. Prof. Venu, in chapter 6, discusses E.J. Mishan's approach to consumers' surplus and its areas of application. The commonly used method is the accounting approach. Hence, the paper is titled Cost-benefit Analysis—Consumer's Surplus Approach. Mishan suggests that four types of risks have to be considered: direct risk people normally assume; the involuntary risk; the financial risk; and the psychic risks associated with concern for other people's lives. A number of theories have been propounded still the consumer's surplus is of relevance in many areas of cost-benefit analysis.

Chapter 7 on The National Accounting System, Social Costs and the Quality of Life by Prof. S. Venu examines the attack on the cult of growth and 'growthmania'. The GNP does not measure social welfare in the sense of 'happiness' or 'sorrow' caused by growth, etc. The GNP and per capita national product also draws a veil on the inequalities in the distribution of income and wealth.

The cost-benefit analysis, CBA, while it has not made much headway in the field of income distribution, pays some attention to the quality of life. It highlights environmental pollution, a phenomenon completely omitted by the GNP calculus. It weighs the pros and cons of health services, education, tourism and other fields. The GNP merely records growth rate in monetary terms without taking into account the imbalances created by such growth. In the concluding section, the Quality of Life' model of Nordhans and Tobin is examined initially. Although it is a pioneering attempt to measure gross social welfare, GSW, it has a number of drawbacks which render its practical utilisation unfeasible. The GNP will continue to be our main measure of 'welfare', supplemented by micro-CBA studies.

Mr. J.N. Tewari in his paper Social-Cost Benefit Measurement in Education and Transport Sectors (Chapter 8) stresses the need for identification of benefits in project appraisal and their quantification and measurement. Adequate data base in necessary for completing the appraisal exercises. This can be done even in sectors like transport and education. There are also the difficulties in measurement. The presentation of the report is the crucial aspect as the choice will have to be made between different alternative assumptions. The project has to be appraised on the various assumptions. This has to be considered from the angle of the availability of data and also the time schedule.Mr. Tewari has dealt with the quantification and measurement of benefits with reference to transport and education.

The last two chapters are by Mr. S.K. Gandhe. Chapter 9 Little and Mirrlees Technique of Project Appraisal—A general assessment. This chapter as is evident, describes the technique of project appraisal adopted by Little and Mirrlees. The cost-benefit analysis is distinguished from the commercial and financial appraisal. How this has to be adopted in the developing countries is also discussed. The salient features of the technique are given. The technique is fully justified in the Indian context. The technique provides a suitable basis for micro-level planning. At least the cost-benefit analysis should form part of the programme undertaken by the Government. Successful planning depends on the micro-level approach. The costs and benefits are spread over a number of years and it is necessary to combine the cost and benefit streams that extend over several time periods to obtain a measure of the profitability of the project. The chapter highlights the important features of the cost-benefit technique.

The last chapter is, A Social Cost Benefit Analysis of a Sugar Production and Refining Project in Goa—An Application of the Little-Mirrlees Technique of Project Appraisal. This case study is illuminating and is an application of the LM method to a sugar production and refining project in Goa. This chapter thus presents the application of a social cost-benefit approach to the Indian context. The Discounted Cash Flow Technique is adopted for appraising the project. The Internal Rate of Return is also calculated.

The Government derives incomes from private projects and the long-term economic growth depends on savings which could be reinvested to generate future consumption benefits. In recent years, sensitivity analysis is often being used and it is a very useful tool for knowing the effect of changes in the values of certain variable costs or benefits on the project's profitability. Problems of forecasting future values of variable costs and benefits arise for the projects which depend on agricultural production. In the case of industry, the input-output co-efficients are relatively easy to derive. In the case of agriculture, it is difficult to predict with certainty the future behaviour of some variables. The supply price of labour is also uncertain. The LM technique is adopted to the sugar production and refining project in Goa with these limitations.

I am extremely grateful to Dr. J.P. Bhattacharjee who had passed on to me some of his papers on evaluation as also of one or two of his colleagues' papers in 1965 when he was the Chief, Programme Evaluation Organisation, Planning Commission, New Delhi. When I found that those papers were still not published and as I had collected some more papers from my other friends, I was inspired to bring them out in a monograph form. I am grateful to Dr. Bhattacharjee who is presently working as Director, Policy Analysis Division, Food and Agriculture Organisation, Rome for his permission to utilise his papers. I am equally indebted to Mr. Dar who is presently the Senior Research Fellow in the Centre for Research in the Federal Financial Relations, Australian National University, Canberra for his permission to utilise his paper as also the one co-authored with C.S. Grewal. I am thankful to the Indian Statistical Institute, Calcutta, for agreeing for the inclusion of the latter. I am grateful to the Planning Commission for permitting me to use some of the unpublished material lent by Dr. Bhattacharjee at that time. I have drawn freely material and ideas from those unpublished works for my paper also.

Mr. J.N. Tewari with whom I have been associated ever since he was Joint Director, P.E.O. very kindly permitted me to include his two papers contained in this monograph. Prof. S. Venu has given two papers on Cost-Benefit Analysis at my request. Mr. S.K. Gandhe willingly agreed for my using the material contained in his Dissertation which he submitted for a Research Degree of a British University. The last two chapters are based on this piece of his research work. I would like to place on record my grateful thanks to the contributors for having agreed to include their papers in this monograph. Project appraisal and evaluation are important tools in the context of planning. It is hoped that this monograph which contains papers on evaluation and Cost-Benefit Analysis would prove useful to all those concerned.
July 1980                                                               K. PUTTASWAMAIAH

Preface to the First Edition                                              ix
Contributors                                                                 xvii
1. Philosophy, Perspectives and Objectives
of
Evaluation
R.K. Dar                                                                           1
2. Objective, Scope and Methods of Evaluation
K. Puttaswamaiah                                                           7
3. Approach to the Formulation of Criteria in
Evaluation
J.P. Bhattacharjee                                                         23
4. Methods of Evaluation of Field Programmes
K. Puttaswamaiah                                                         37
5. Some Issues in Methodology of Evaluation
with
Large Social Content
R.K. Dar and C.S. Grewal                                              47
6. Household Approach in the Evaluation Studies
J.N. Tewari                                                                    63
7. Evaluation—Some General Aspects
K. Puttaswamaiah                                                        75
8. Planning Evaluation of Applied Nutrition
Programme
K. Puttaswamaiah                                                        87
9. The National Accounting System, Social
Costs
and the 'Quality of Life'
S. Venu                                                                        99
10. Social Cost-Benefit Measurement in Education
and Transport Sector
J.N.Tewari                                                                  117
11. Little and Mirrlees Technique of Project
Appraisal—A General Assessment
S.K.Gandhe                                                               131
12. A Social Cost-Benefit Analysis of a Sugar Production
and Refining Project in Goa—An
Application of the Little-Mirrlees Technique of
Project Appraisal
S.K. Gandhe                                                             157
Select Bibliography                                                  183   
Index                                                                       193

Project Evaluation Criteria and Cost Benefit Analysis by K. Puttaswamaiah, Oxford and IBH Publishing Co. New Delhi/ 1989 (second edition), Pages 196

There is an, urgent need for a good text book on evaluation. Short of that Puttaswamaiah has come out with a collection of papers on evaluation written by eminent scholars like J.P. Bhattacharjee, R.K. Dhar etc. Since this is a second edition, the eminent scholars who have written later such as the reviewer, have not been included. The fact that the book has com out with the second edition reflects the demand. The author needs to be congratulated for the pains he has taken, The book in fact consists of two parts. Chapters 1 to 8 deal with the subject matter of evaluation-the nature and scope, types of evaluation and the role evaluation plays in public policy. Chapters 9 to 12 form part two. These deal mainly with cost benefit analysis on which much awareness is required in the country.

What is evaluation ? What is its aim ? What are the different types of evaluations in evaluation ? How is evaluation different from scoial surveys and sample studies ? What is its justrification ? Puttaswamaiya's collection provides some answers to these questions.

Evaluation seeks to search for factors which favour or hinder the objectives of the programmes. In India, evaluation has been considered as an essential aid to the formulation and implementation of the programme. It has also helped in revising the 'Guidelines' issued by Government. Evaluation studies are basically diagnostic in nature. It should be objective in nature. J.P. Bhattachargee holds that evaluation is a special field of social science research. Evaluation should follow 'scientific method' and it should be purposeful in its approach, analysis and results. Evaluation involves judgement. Both quantitative and qualitative data are used; also both primary and secondary. This gives balance.

An evaluator must suggest remedial measures for taking corrective action by those responsible for the execution of the programme. R.K. Dhar emphasises use of proper quantitative observations in evaluation. There is no doubt that evaluation is a challenging task.

YOJANA, November 18-31, 1989

The issues of GNP and CBA are discussed ably by S. Venu and S.K. Gandhe. Gandhe bases his observations on a case study of a sugarcane factory in Goa. His expositition of Little and Mirrless technique of project appraisal is excellent. J.N. Tewari has contributed two important essays. Puttasamaiya's two papers have overlapping and repeatitive sentences and he being the editor could have edited them properly even at the risk of reducing the matter. His one paper is a lecture note. The author has expressed sentences from the Proceedings. of the Conference of central and state evaluation officers held in New Delhi in 1978.

We do hope that this book will be well received and planners and policy makers will derive useful inspiration to improve their performance by taking course to evaluation and cost; benefit analysis in the projects they are entrusted.

                                                                                               S.M. Shah

PROJECT EVALUATION CRITERIA AND COST-BENEFIT ANALYSIS
EXTRACTS OF REVIEWS
"The book is an exceptionally well integrated study with imaginative set of proposals and suggestions. It is a useful addition to the available current literature on the subject and can be profitably used by students as well as planners and administrators. No future examination of project evaluation and cost benefit analysis should fail to cite this remarkable work."
               - Yojana
"This book which analyses the methodology of cost benefit analysis and also includes some case studies would be welcomed by students of growth and development."                                                                                                                      -Eastern Economist
"This is a useful exercise in finding, assessing and applying project evaluation criteria and cost benefit analysis in the context of both costs and benefits understood in different ways at the macro-level of the country or an individual sector and at the micro level of a particular operating unit or its components. A useful bibliography has been appended at the end which enhances the usefulness of the volume to project evaluators and researchers."
                -Financial Express
"On the whole, it is an exhaustive book on the tool of cost benefit analysis. All the salient aspects of the concept are examined and discussed by writers, well-known for their reputation and scholarship."
                -The Hindu
"This is a useful book for planners in Government as well as in institutions oriented towards social and economic development."
                -The Mail
"The book will be extremely useful for those who, in some way, are involved in the project formulation, appraisal and implementation."
                -Indian Journal of Agricultural Economics
"On the whole this is a useful monograph for researcher analysis who are primarily engaged in project appraisal and social cost benefit analysis."
                -Margin